When can a minority shareholder be considered part of an economic group from the perspective of the Brazilian Competition Law?

The concept of “economic group” from the perspective of the Brazilian Competition Law

Brazilian Competition Law establishes that, for the purposes of notifying merger cases to the Administrative Council for Economic Defense (“CADE”), the revenues of the economic groups involved from each side of a given transaction must be considered.

In this regard, an economic group is defined as:

• The set of companies subject to a common control, internally or externally; and
• Companies in which the companies mentioned above hold, directly or indirectly, at least 20% of its capital stock or voting capital.

For investment funds, the following must cumulatively be considered as members of the same economic group:

• The economic group of each shareholder holding at least 50% of the shares of the fund, individually or by means of a shareholder’s agreement; and
• The companies controlled by the fund involved in the transaction and companies in which the fund holds, directly or indirectly, 20% or more of its capital stock or voting capital.

There may be uncertainty in the case of minority shareholders that have certain rights and, consequently, are considered part of an economic group for the purposes of notifying transactions to CADE.

APAC: JusBrasil and Digesto

This topic was discussed at CADE’s ruling session held on March 20, 2024, during the analysis of the administrative proceeding aimed at investigating a concentration act (“APAC”), in which the Tribunal considered that the companies Digesto and JusBrasil had closed a transaction before obtaining CADE’s approval – which is a practice known as gun jumping¹.

During the analysis of the APAC, initiated on January 23, 2023, the parties argued that the transaction was not submitted to CADE because it did not meet the revenue criteria established in article 88, II of the Brazilian Competition Law, and article 4, paragraph 1, of CADE’s Resolution No. 33/2022, given that Jusbrasil and Digesto were not under the common control of other economic groups.

According to CADE’s General Superintendence, the transaction indeed demanded notification, given that there were minority investment funds in the corporate structures of the companies involved in the transaction that should have been considered when calculating the revenues involved. This was due to the rights granted to minority investment funds in the shareholder agreements of Digesto and Jusbrasil, which were sufficient to confirm the shared control over these companies.

The APAC was analyzed by CADE’s Tribunal, which endorsed the opinion of the General Superintendence, but unanimously decided, in accordance with the reporting commissioner’s vote, not to impose a fine on the parties. The Tribunal considered that CADE had not yet established a clear understanding of the scope of the rules on investment funds and, therefore, the parties had reasonable grounds to understand that the transaction did not demand notification. Although the discussion raised by CADE’s Tribunal was not new, the commissioners’ votes consolidated CADE’s case law on this important matter.

Methodologies used by CADE

Initially, it was clarified that in the event that a company directly involved holds an investment fund in its corporate structure, acting as a shareholder or quota holder, this fund will only be considered as part of the company’s economic group if it exercises internal or external control over it. This will allow the analysis of the group to which the fund belongs, in compliance with the guidelines previously mentioned.

When reviewing CADE’s case law, there are three potential methodologies to define when a minority shareholder holds controlling power and must therefore be considered as part of an economic group for the purposes of notifying transactions to CADE.

Confirmation of the operation of the company’s decision-making bodies, such as the general meeting, board of directors and executive board, to confirm whether minority shareholders hold control power, based on an analysis of the company’s internal documents, including minutes of the board of directors’ meetings, meeting presentations, as well as management and financial reports. This methodology is the least common and is excessively costly for CADE.

Presumption of control based on rights attributed to minority shareholders in shareholders’ agreements. This methodology is the most used by CADE’s General Superintendence and allows for the identification of special rights attributed to minority shareholders by analyzing instruments such as the company’s bylaws or shareholders’ agreement.

Based on the precedents, CADE’s Tribunal, in line with the vote of the reporting commissioner, concluded that the following minority rights create the presumption of shared control, and listed the minority rights that only involve investment protection:

Presumption of control based on the ordinary shareholding of 20% stake. This methodology, also adopted in several precedents by the General Superintendence and CADE’s Tribunal, is based on the argument that companies that control more than 20% of the share capital or voting rights are considered to be part of the same economic group, regardless of whether they actually exercise political rights or not.

The ineffective publicity of information that is important for managed parties to assess the need for notifying CADE of executed transactions was also addressed by CADE’s Tribunal.

Finally, the reporting commissioner indicated the need to revise CADE’s Resolution No. 33/2022, aimed at establishing objective and quantitative criteria for identifying notifiable cases involving such rights or developing a guide with clear guidelines for managed parties.

Demarest’s Competition practice area emphasizes the importance of analyzing transactions individually and remains available to provide clarifications on this or other matters.

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[1] Administrative Proceeding to Investigate Concentration Act No. 08700.000641/2023-83. Defendants: Digesto Pesquisa e Banco de Dados S.A. (“Digesto”) and Goshme Soluções Para A Internet Ltda. (“Jusbrasil”).